Enbridge (TSX:ENB)(NYSE:ENB) is one of the highest-yielding large-cap TSX stocks. With an 8% yield as of this writing, it pays an astounding $8,000 in cash each year on every $100,000 invested. That’s a pretty impressive cash payout for a $100,000 investment. Unfortunately, you’ll inevitably pay some taxes on a position that large. $100,000 is too much money to contribute to a TFSA, and RRSPs aren’t truly “tax free” when you go to withdraw your money. There is, however, a way to get $6,040 in ENB dividends tax-free this year. In this article, I’ll explore how to do that.
Hold $75,500 worth of ENB in a TFSA
In 2020, you are eligible for up to $75,500 worth of TFSA contribution room. Any investments held in a TFSA are tax-free, so that’s a $75,500 portfolio you can potentially pay no taxes on. There are only two conditions for being eligible for this $75,500 worth of tax free space:
- You need to have been 18 or older in 2009.
- You can’t have made past contributions that lower your contribution room.
The age requirement could unfortunately be an absolute barrier to building a $75,500 TFSA portfolio. If you turn 18 this year, then you only get $6,000 worth of total space.
The “past contributions” thing shouldn’t be too big of a problem. As long as you held cash, or investments with returns greater than 0%, then you can still create a $75,500 Enbridge position in a TFSA.
That produces $6,040 a year!
At today’s prices, ENB stock yields about 8%. That means that a $75,500 position in it pays out $6,040 per year. That’s quite a high yield for only $75,500 invested. And all it takes is a single position in ENB stock.
Of course, you should never put your entire portfolio all in one stock. Diversification is key to reducing risk. But you could conceivably create a diversified portfolio with an 8% average yield. For example, you could hold stocks like Enbridge, ETFs like BMO Covered Call Utilities ETF, and so on. With enough securities, you’d have a well-diversified portfolio with an average yield of 8%.
Is Enbridge a good business?
The fact that Enbridge stock yields 8% today doesn’t mean much.
If the dividend is cut tomorrow, then you’ll never see that 8%.
Before you invest in a dividend stock, you need to know whether the company is profitable enough to keep the dividends coming. While a thorough analysis of Enbridge stock is beyond the scope of this article, a few basic points about the dividend are worth mentioning:
- In the most recent quarter, the amount of dividends paid was only 66% of cash from operating activities.
- Enbridge’s dividend has grown by 10% annualized over the last 26 years.
- Compared to other energy stocks, Enbridge wasn’t too severely impacted by the COVID-19 pandemic. Earnings were down this year, but cash flow remained strong.
All of these facts point to Enbridge’s dividend being sustainable. Of course, there are a million other factors you’d need to look at before deciding whether Enbridge was truly a worthy investment. But if we’re talking about the dividend and nothing else, it looks pretty safe.
